Implemented in stages, the Financial Service (Banking Reform) Act 2013 has enabled HM Treasury to make significant reforms to the regulation of the financial services industry to promote transparency and greater accountability within senior management.
The Act introduced the framework for the senior managers and certification regime which came in on 7 March 2016. Individuals that perform a senior management function (as specified by the FCA or PRA) within UK banks, building societies, credit unions, PRA-designated investment firms and Solvency II firms are subject to pre-approval by the regulators and will be held accountable for their conduct. Other individuals that hold positions that could seriously harm the institution, its reputation or its customers are not pre-approved but they must be certified as fit and proper for their roles.
The new criminal offence of "reckless misconduct in the management of a financial institution" (created by section 36 of the Act) also came into force on 7 March 2016. Intended to deter reckless management decision making within banks and building societies, senior managers ("SM") now face unlimited fines or up to 7 years imprisonment if successfully convicted.
The offence has three key components:
- SM made a reckless management decision or failed to prevent a reckless decision from being taken which caused the financial institution to fail;
- at the time the decision was taken, SM was aware of the risk that it may cause the institution to fail; and
- SM's conduct in relation to the decision was far below what could be reasonably expected of a person in his position.
These are likely to be significant hurdles for the regulators to overcome and the effectiveness of the offence may depend on its ability to bring successful prosecutions.